One aspects of the overnight risks is the GAPS, that themarket presents at the regular market openin those instruments, not traded24 hours a day.

Day traders also impacted when formulating their market participation strategiesdepending upon the GAPat the market open.

To help formulating those strategieswe would like to know what happens afterthose GAPs.

For us the pointersin many cases are in the form of probabilities, so wecreated some studies to find out what can we expect after a GAP.

Firstto define a GAP, we present the following image, which consists of two candles:

The GAP is between the Close of the first candle and the open of the second candle.

The GAP percentagecan be calculated as follows:

GAP [%] =ABS((C2.Open – C1.Close) / C1.Close * 100)[%]

The actual GAP is a GAP Up, if C2.Open is greater than C1.Close, or a GAP Down if the C2.Open isbelow C1.Close.

One important aspects that we would like to know,isrelated to the retracement of the GAP during the market day.

We saythat a GAP 100 [%} retraced, If themarketGAPs Up today and moves below the close of the previous day or GAPs down Today and moves above the Close of the previous day.

The following table presents some of the results of our study, that we created about GAPretraces.

For the study we used the daily data of the NASDAQ100 index – following ETF symbol, the QQQQ. Similar results could be attained for the S&P500index followingSPY symbol.

We created four categories ofGAP sizes, and four categories of GAP retraces.

First column in the table presents the probabilities, that the market retraces at least 38 [%] of the GAP.

The second column in the table presents the probabilities, that the market retraces at least 50 [%]

The third column presents the probabilities, that the market retraces at least 66 [%] of the GAP, and the last column presents the probabilities, thatthe market fills the GAP, or retraces 100 [%]of itsometimes during the day.

Some comments and conclusions after looking at the results:

-Most of the time, forsmaller GAPs we have a very high probability, that the market will retrace 38 [%] oreven 50 [%] of those gaps,so if we would like to play in the direction of the GAP, we do not necessarily need to hurry or can get better prices witha little bit of patience.

-This also mean, that in many casesplaying against the GAP right from the openmight bea very successfulshort – term playintraday trading strategy.

In this case shooting for at least a 62 [%] retracement might have a good win probability, as the probability numbers for at least a 50 [%] retracement is only marginally bigger than the probability of at least a 62 [%] retracement.

-Logically , the bigger the GAP, the smaller the probability that it will be retraced 100 [%] during the day. For GAPs, above 1 [%] the probability, that it will be completely retraced during the day is only 50.6 [%], roughly50 fifty /fifty.

This also explains, why do we have relatively little chance, if the market GAPs against the predicted direction with a bigger than1[%] GAP.

-We selected the 38 [%], the 50 [%], the 68 [%] and the 100 [%] as they are close to the Fibonacci retracementlevels. The importance of the Fibonacci numbers relatively low for GAPs, smaller than 0.5 [%],as we have almost 80 [%] probabilitythat the market will retrace 100 [%] of those GAPS sometime during the day.

-In the above study we did not take into account any other market parameters, that might have someimpacton the actual probabilities.Some of these could be like:

oThe information, that the predictor predicted the directionin the direction of the GAP or against the direction of the GAP.

oAny other indicators or market data, or economic data.

Taking these into account one by one at a time we found that the difference in the actual probability might be different by 3 – 7[%]

Now having the retracement / Fill probabilities fordifferent settingsas the next step we would like to get answer for the following question:

Considering, that the market retraces at least the 38 / 50 / 62 / 100 [%] of the GAP alreadyoccurred during the day. What is the probability than, that the markettakes a 180 degree turn andwill close above themarket open(in case of a GAP UP ) or Below the market open (In case of a GAP Down).

The following table present the results:

Some of the conclusions from the data:

-Even after a Big GAP (Up / Down) and a 100 [%] retracement of that we still have 18.7 [%] probability, that the market turns, and turns in a big way, by moving back above the open (In case of a GAP UP) or below the open (in case of a GAP Down)

Presenting a 100 [%] retracementis likeputtingthe market in a different trajectory.

-If the marketturnsback toward the original direction of the GAP without a 100 [%] retracement, thanthe actual retracement levelwill havelittle determining factorfor the probability of reaching the opening level. It isroughly 40 [%]for most GAPs, smaller than 1 [%]